www.elsblog.org - Bringing Data and Methods to Our Legal Madness

05 April 2007

Dummy Variables in Cross-Country Regressions

I post the following at the request of a current student at Marquette. If you have any insights for him, please post a comment or email me at jason.czarnezki@marquette.edu.

"I am writing a paper on economic growth and
want to look at the effects, if any, that the mixture of civil law and common
law in Louisiana has had on that state's rate of growth. Theory and past
research using cross-country regressions show that nations with civil law
origins have lower rates of economic growth, all else constant. I want to use a
cross-state comparison (LA, MS, AL, and AR) and include a variable that captures
the affects of LA's mixed legal system of the state's rate of growth. Most of
the research I have looked at uses a simple binary choice dummy variable to
distinguish the legal origin. However, as you probably know, this dummy can
pick up influence from any number of variables not included in the model and
that are unrelated to legal origin. Therefore, I have been trying to come up
with some way to capture the legal origin distinction, but with a proxy variable
that provides a greater quantitative distinction for legal origin than the
dummy. Some quantifiable measure that would theoretically move with the ebb and
flow of civil law influence on the state's legal system, which has waxed and
waned since LA became a state. There may be no real good solution for this
problem (which I imagine is why dummy variables exist in the first place), but I
would appreciate greatly any helpful comments or ideas."